Recover debts from your customers as quickly as possible is important. This is because in your business, your your main income is from yours customers, but the income will only materializes into cash when they actually pay up! Until the customer pays, you are financing their needs.
Your business is better off to keep your bad debts and your level of accounts receivable (debtors) to a minimum by having a good credit control procedures in place. It is recommended that your business always check the creditworthiness of your customers, either through a banker’s reference or by using an independent credit rating agency such as Noddle or Experian.
Customers with bad credit rating should be on cash on delivery terms. Your business should also monitor the time taken by your customers to pay you. The longer your customers take to pay, the higher chance that their debt will turn bad.
Early payment discounts or pay by installments
Encourage customers to pay sooner by offering early payment discounts or payment by installments.
Take legal actions
Do not be afraid of taking legal action to recover debts from your customers. Often, the threat of legal action against a financially unsound customer will make them pay up quickly as they do not want their other creditors to be aware of their financial situation because this may lead them stop supplying goods and services on credit.
Use aged debtors report to monitor
Most bookkeeping and accounting software comes with aged debtors reporting. This report is a simple report summarizing the amounts owed by customers and how old the debts were. You can see at a glance which customers are taking ages to pay.
An example of aged debtors report
If you are still using excel spreadsheet for your bookkeeping, and your customers base has expended steadily. Then, consider to invest in online bookkeeping software like Clearbooks or Xero.
However, you could create your own aged debtors’ report using an excel spreadsheet if your customers base is manageable. And, a regular updating the report would not be a hassle and not taking consideration of your time.
Based on the above example, it may be wise to put in the effort to get LoveU Limited to pay up the £20,000 sooner by offering discounts. At the same time, stop giving credit until the sum has been paid up. Similarly, for Missed Ltd, the debt of £300 may need to be written off as bad debts in your company accounts if it is not recoverable.